Retirement models getting shake up

By Rachel Lane

Lendlease’s new range of payment options for retirement village residents is making waves in the retirement village space.

Not to be left behind, Stockland has recently announced that it will be offering new residents of its 64 villages two options, which they have called “Peace of Mind” and “Capital Share”.

Retirement villages offer very different models.Credit:Tanya Lake

So what are these “new and improved” options?

In the Peace of Mind option, the resident pays an amount for their unit on entry and a deferred management fee when they leave calculated at 5 per cent per year for 5 years (25 per cent), based on the purchase price. Under this option the resident does not share in any capital gain or loss and Stockland covers anyrefurbishment and selling costs. Peace of Mind also offers a guaranteed buyback once the unit has been on the market for 6 months.

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The Capital Share option is essentially Stockland’s current contract. The resident pays the same amount for their unit that they would pay under the Peace of Mind option, but on exit the deferred management fee is calculated at 5 per cent per year for 7 years (35 per cent), based on the purchase price. On exit, the resident shares any refurbishment and selling costs, and takes an even split on any capital gain with Stockland. Capital Share offers a guaranteed buyback after 18 months (subject to state legislation).

So what do the options look like when you crunch the numbers?

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To make it easier to compare the costs I will break it down into the ingoing, the ongoing and the outgoing. This approach ensures that fees and charges are accounted for when they are payable, and gives a clear picture of whether or not the transaction as a whole is affordable.

Let’s look at an example.

Shirley currently has a house worth $800,000, plus $100,000 of investments and $30,000 of personal assets. She wants to buy a unit in a Stockland retirement village for $450,000.Shirley currently receives age pension of $23,598/year.

Here’s how Shirley’s options look if she stays in the village for 10 years:

As you see, at a growth rate of 3 per cent per year over 10 years, the two options give almost the same outcome. But the growth rate could change the Capital Share results significantly. If the unit grows by only 2 per cent per year then Shirley’s exit entitlement could shrink to $318,546, less than what she could have received under the Peace of Mind option. But if it grows by 4 per cent per year then she would receive $375,563 within 18 months of leaving the village. In the worst case – though not as likely – if the unit sold for less than what Shirley paid she would bear half of the loss. Remember also that the costs for refurbishing and selling the unit are paid by Shirley, and they could be better or worse.

Unlike the options being offered by Lendlease and IRT, which we covered in recent weeks, the options being offered by Stockland don’t change the purchase price – there is no option to pay the full price upfront, meaning the resident must pay an exit fee. Likewise, because the purchase price is the same under each option the effect on the pension remains the same – in Shirley’s case a reduction of $17,648/year.

What these options really boil down to is a choice. Peace of Mind offers a guaranteed return of 75 per cent of what you paid upfront within 6 months of your departure. Capital Share offers an unknown amount: you are betting that the 10 per cent higher exit fee, refurbishment fees and selling costs will be more than offset by your 50 per cent share of capital gain, and you are willing to bear the downside risk and wait up to 18 months for your money. It’s all about choosing the option that works best for you.